Economics 262

International Monetary Economics

Spring 2005

Professor Stanley Black Office Hours

200C Gardner Hall TTh 10-12

Books and Journals used frequently are referred to as follows:

H&M Hallwood & MacDonald International Money and Finance (text, available in bookstore)

Handbook2 Jones and Kenen (eds.) Handbook of International Economics, Vol. 2 (avail. in bookstore)

Handbook3 Grossman and Rogoff (eds.) Handbook of International Economics, Vol. 3 (available on reserve)

O&R Obstfeld and Rogoff Foundations of International Macroeconomics (text, avail. in bookstore)

Dornbusch Open Economy Macroecomics (Basic, 1980)

Frenkel Exchange Rates and International Macroeconomics (Chicago-NBER, 1983)

Meade The Balance of Payments (Oxford, 1953)

Mundell International economics (Macmillan, 1968)

RIE Caves and Johnson (eds.) Readings in International Economics (AEA, 1968)

AER American Economic Review

CJE Canadian Journal of Economics

EER European Economic Review

IMFSP IMF Staff Papers

JDE Journal of Development Economics

JIE Journal of International Economics

JIMF Journal of International Money and Finance

JPE Journal of Political Economy

QJE Quarterly Journal of Economics

SJE Scandinavian Journal of Economics

Requirements: Term Paper and Final Examination; * indicates optional reading

Lecture Notes

I. Balance of Payments Concepts

H&M, ch. 2

O&R, ch. 1.1-1.2

Dornbusch, ch. 2

McKinnon, Money In International Exchange Oxford 1979, ch. 1,3,4

*Meade, ch. 1-3

II. Current Account Adjustment

A. Elasticity approach

H&M, ch. 3

Handbook2, ch. 13, Kenen, sec. 3.1-3.3, ch. 16, sec. 1.2.

*Haberler, "The Market for Foreign Exchange and the Stability of the Balance of Payments," Kyklos 1949, 3:193-218

Dornbusch, "Exchange Rates and Fiscal Policy in a Popular Model of International Trade," AER 1975, 65:859-871

*Meade, ch. 6

Armington, "A Theory of Demand for Products Distinguished by Place of Production," IMFSP1969, 26:159-178

*Handbook2, ch. 20, Goldstein and Khan, "Income and Price Effects in Foreign Trade"

B. Absorption approach

H&M, ch. 4

Handbook2, ch.13, Kenen, sec. 3.4-3.5

Johnson, "Towards a General Theory of the Balance of Payments," RIE

*Alexander, "Effects of Devaluation on a Trade Balance", RIE

*Meade, ch. 4-5

Dornbusch, pp. 78-81

C. Nontraded goods and Purchasing Power Parity

H&M, ch. 7

Handbook2, ch. 16, Bruce and Purvis, sec. 1-2.

Dornbusch, ch. 6

*Salter, "Internal and External Balance: The Role of Price and Expenditure Effects," Economic Record 1959, 35:226-38

Corden and Neary, "Booming Sector and De-industrialization in a Small Open Economy," Economic Journal 1982, 92: 825-848

O&R, ch. 4.1-4.3

*Froot & Rogoff, "Perspectives on PPP & Long-Run Real Exchange Rates", Handbook3, ch.32

D. Monetary approach

H&M, ch. 8

Handbook2, ch. 14, Frenkel and Mussa, sec. 3

O&R, ch. 8.2.7

Dornbusch, ch. 7

*Mundell, "Barter Theory and the Monetary Mechanism of Adjustment," Mundell, ch. 8

Polak and Argy, "Credit Policy and the Balance of Payments," IMFSP 1971, 18:1-24

III. Capital Account Adjustment

A. Fleming-Mundell approach

H&M, ch. 5

Handbook2, ch.13, Kenen, sec. 4

Mundell, "The International Disequilibrium System," Kyklos 1961, 14:154-172 or Mundell, ch 15

*Swan, "Longer-Run Problems of the Balance of Payments," RIE

*Meade, ch. 8-10

Handbook2, ch. 16, Bruce and Purvis, sec. 3-4.

*Sachs, "Wages, Flexible Exchange Rates, and Macroeconomic Policy," QJE 1980.

Gylfason & Risager, "Does Devaluation Improve the Current Account?" EER 1984.

Handbook2, ch. 17, Marston, sec. 1-5

*Mundell, "Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates," Mundell, Ch. 18 or CJE 1963, 29:475-485

Mundell, "The Monetary Dynamics of International Adjustment under Fixed and Flexible Exchange Rates," QJE 1960, 74:227-257 or Mundell, ch. 11

Korkman, "Exchange Rate Policy in Relation to Internal and External Balance," SJE 1977, 79

B. Intertemporal approach

O&R, ch. 1.3-3.6

* Bergin, and Sheffrin, “Interest Rates, Exchange Rates and Present Value Models of the Current Account,” EJ 2000, pp. 535-58

*Frenkel and Razin, Fiscal Policies and the World Economy, MIT Press 1987, ch. 5-7.

Backus, Kehoe, & Kydland, "Dynamics of the Trade Balance & the Terms of Trade: the J-Curve?" AER, 1994, 84-103.

*Feldstein and Horioka, "Domestic Savings and International Capital Flows," EJ 1980.

Dooley, Frankel, and Mathieson, "International Capital Mobility," IMFSP 1987.

Tesar, "Savings, Investment, and International Capital Flows," JIE 1991.

*Razin, "The Dynamic-Optimizing Approach to the Current Account: Theory & Evidence" Kenen (ed.) Understanding Interdependence, ch. 5.

*Baxter, "International Trade and Business Cycles" Handbook3, ch. 35.

Ventura and Kraay, “Current Accounts in Debtor and Creditor Countries,” QJE, 2000.

IV. Exchange Rate Determination

A. Exchange rate dynamics

H&M, ch. 9

O&R, ch. 9.1-9.3

Dornbusch, "Expectations and Exchange Rate Dynamics," JPE 1976, 84:1161-1176

*Black and Salemi, "FIML Estimation of the Dollar-Deutschemark Risk Premium in a Portfolio Model," JIE 1988.

Buiter and Miller, "Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation" EER 1982

*Handbook2, ch. 18, Obstfeld and Stockman, "Exchange Rate Dynamics"

*DeGrauwe, et al, Exchange Rate Theory: Chaotic Models of Foreign Exchange Markets, 1993.

B. Equilibrium Models

H&M, ch. 11.4

O&R, ch.8.1-8.3, 8.7

*Lucas, "Interest Rates and Currency Prices in a Two-Currency World," Journal of Monetary Economics 1982:335-359.

*Hansen and Hodrick, "Risk Averse Speculation in the Forward Foreign Exchange Market," in Frenkel, 1983

*Stockman & Dellas, "International Portfolio Nondiversification," JIE 1989:271-289.

*Grilli and Roubini, "Liquidity and Exchange Rates," JIE 1992:339-352.

C. Portfolio approach

H&M, ch. 10

Handbook2, ch. 15, Branson and Henderson, sec. 2

O&R, ch.5.1-5.3

*Black, International Money Markets and Flexible Exchange Rates, Princeton Studies in International Finance No. 32, 1973, ch. 1-4

Frankel, "In Search of the Exchange Risk Premium: A Six Currency Test Assuming Mean-Variance Optimization," JIMF 1982, 1:255-274

D. Market efficiency and parity conditions

H&M, ch. 11-12

Taylor, "Exchange Rate Behavior", Kenen (ed.) Understanding Interdependence, ch. 5 sec IV&VII

*Frankel & Rose, "Empirical Research on Nominal Exchange Rates" Handbook3, ch. 33

Froot and Frankel, "Forward Discount Bias: Is it an Exchange Risk Premium" QJE 1989, 104:139-161.

*Lewis, "Puzzles in International Financial Markets" Handbook3, ch. 37

McCallum, “A Reconsideration of the Uncovered Interest Parity Relationship,” JME 1994, 33:105-132.

E. Sticky Price Intertemporal Model

Obstfeld & Rogoff,(O&R ch.10) "Exchange Rate Dynamics Redux" JPE 1995 102:624-60.

*Warnock, AIdiosyncratic Tastes in a Two‑Country Optimizing Model: Implications of a Standard

Presumption@ JIMF 2003.

*Obstfeld & Rogoff, ANew Directions for Stochastic Open Economy Macro Models,@ JIE 2000.

New Open Economy Macroeconomics Homepage

V. Black Markets and Crisis Models

A. Black Markets and Equilibrium

Edwards, Real Exchange Rates, Devaluation, and Adjustment, Ch. 3.

Halpern & Wyplosz, AEquilibrium Exchange Rates in Transition Economies@ IMFSP 1997.

Kharas & Pinto, “Exchange Rate Rules, Black Market Premia, and Fiscal Deficits: the Bolivian Hyperinflation” REStudies 1989.

*Agenor, "Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange" IMFSP 1990, 37:560-592.

B. BOP Crisis Models

O&R, ch. 8.4, 9.5.4

H&M, ch. 14

Krugman, "A Model of Balance of Payments Crises" Journal of Money, Credit, & Banking 1979.

*Flood & Garber, "Collapsing Exchange Rate Regimes: Some Linear Examples" JIE 1984, 17:1-16.

Obstfeld, "Rational and Self-Fulfilling Balance-of-Payments Crises" AER 1986, 76:72-81.

*Garber & Svensson, "Speculative Attacks on Fixed Rate Regimes" Handbook3, ch. 36.4

Black, Christofides, and Mourmouras, AConvertibility Risk@ IMFWP01/210.

VI. Exchange Rate Policy

A. Optimal exchange rate policy

Henderson, “Exchange Rate Intervention Operations,” in Bilston and Marston (eds.) Exchange Rate Theory and Practice NBER, 1984

*Black, "The Effect of Alternative Intervention Policies on the Variability of Exchange Rates: the Harrod Effect," in Bhandari (ed.) Exchange Rate Management Under Uncertainty MIT Press, 1985

Dominguez & Frankel, Does Foreign Exchange Intervention Work? IIE 1993.

Vitale, “Speculative noise trading and manipulation in the foreign exchange market,” Journal of International Money and Finance 2000, 689–712.

O&R, ch. 8.5

Svensson, "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives 1992, 119-144.

H&M, ch. 15

*Garber & Svensson, "Exchange Rate Target Zones" Handbook3, ch. 36.3.

B. Alternative exchange rate arrangements

H&M, ch. 18

Grauwe, The Economics of Monetary Integration, 1992.

Bayoumi, "A Formal Model of Optimum Currency Areas" IMFSP 1994, 41:537-554

Corden, Max, “Exchange Rate Policies for Developing Countries,” Economic Journal 103, January 1993.

Frankel, Jeffrey, “No Single Currency Regime Is Right for All Countries or at All Times,” Princeton Essays in International Finance No. 215, August 1999.

*Black, "Exchange Rate Policies for Less Developed Countries in a world of Floating Rates," Princeton Essays in International Finance No. 119, 1976

*Williamson, Estimating Equilibrium Exchange Rates, 1994.

*Edwards, Real Exchange Rates, Devaluation, and Adjustment, 1989.

C. Policy coordination

H&M, ch. 6

Hamada, The Political Economy of International Monetary Interdependence, 1985, ch. 4

Canzoneri and Henderson, Monetary Policy in Interdependent Economies, ch. 1 & 2.

McKibbin and Sachs, Global Linkages, Ch. 7-8.

O&R, ch. 9.5

Alessina & Grilli, “The ECB: Reshaping Monetary Politics in Europe,” in Canzoneri, ed. Establishing a Central Bank, 1992

D. International monetary arrangements

H&M, ch. 24

Handbook2, ch. 22, Black

Black, "Transactions Costs and Vehicle Currencies," JIMF 1991, 9:512-526.

Miller and Williamson, "The International Monetary System: An Analysis of Alternative Regimes" EER 1988

Obstfeld & Rogoff, “Do We Really Need a New International Monetary Compact?” NBER WP#7864, 2000